Economic Outlook

The Economic Outlook
The following economic outlook comments come from our friends at Goldman Sachs & Co. There continues to be positive trends in many areas.

Better News Drives Up Near-term GDP
Improved news flow in homebuilding, home prices, manufacturing, and employment contribute to an upgrade in our second half 2009 GDP forecast from 1.0% to 3.0% annualized. This change is particularly warranted due to the economic jolt coming from the positive turn in the inventory cycle and fiscal stimulus.

Remaining Headwinds Keep Longer-term Views in Check
The factors driving the near-term rebound are inevitably transitory. Persistent headwinds remain, as 1) consumers continue deleveraging from damaged balance sheets, 2) weak employment weighs on household income, 3) state and local governments cut back, 4) commercial real estate price declines accelerate, and 5) credit availability remains impaired.

Unemployment
The July labor report was the clearest recent sign of economic stabilization as payroll losses posted their smallest decline (-247K) since the Lehman Brothers bankruptcy and the unemployment rate fell for the first time since April 2008 (9.5% to 9.4%). We have tempered our view slightly on labor, now expecting the unemployment rate to reach 10¼% in 2010, down from our previous forecast of 10½%.

Fed Policy
Monetary tightening seems highly unlikely in a world of vast labor and manufacturing slack, contained inflation, and subdued consumption. We think the FOMC will be reluctant to raise the funds target, even from zero, until they have some confidence that the unemployment rate has reached its cyclical peak or will do shortly.

Treasury Yields
The recent sell off seems to have gone too far in response to improving economic data. In our view, the 10-yr will migrate closer to 3% over the next few months.